Professor: Federal Reserve System isn’t working

That was the assessment Monday night of Steve Horwitz, the Charles A. Dana Professor of Economics and department chairman at St. Lawrence University in Canton, N.Y. Horwitz spoke at Grise Hall Auditorium at Western Kentucky University as part of the BB&T Center for the Study of Capitalism lecture series.

“Debt isn’t the problem,” Horwitz said. “The problem is you have a monopoly-based system. Banks can’t lend what people don’t give them. The attempt to provide money through a monopoly doesn’t work.”

The Fed’s track record since its creation in 1913 isn’t good, he said. Recessions and depressions in the U.S. economy have been more frequent after its creation than before, when state-chartered banks controlled the money supply. But that format had issues, too. State-chartered banks couldn’t create branch banks and also couldn’t cross state lines.

The Fed is actually a system of 12 banks across America that has seen more centralized power in Washington, D.C., in recent years.

“Free banking – true competition in the creation of money would work better,” the professor said. Banks would want to perform more efficiently to maximum their profits – interest made on the money – and not see either inflation or deflation occur in the economy.

In the history of America, there has never been a free banking market – there have always been regulations, whether they came from the states or the federal government, Horwitz said. Currency produced by local banks actually financed the Civil War, then when Congress passed a 10 percent tax on state banks’ money, efforts shifted to a federal banking system and that helped pay off Civil War debt.

“There is a long history of central banks being created to raise money for government to pay for wars,” he said.

Like an old warship, though, the central bank moves slowly and takes a while to come into the wind.

“It takes time for central banks to recognize a problem, collect data, make a decision, implement that decision and see the effects of that decision,” he said. “By the time the policy becomes effective, it can be the exact wrong thing to do.”

If someone had said to him a decade ago that reform of the Fed would become a serious discussion in 2013, Horwitz wouldn’t have believed it. However, with recessions in 2007 and 2008 and other regulatory problems with the nation’s banking system, the discussion is on the front burner.

“We were talking about the Fed in macroeconomics class,” said Raymond Shears, 21, a WKU junior business major from London. “It was good to hear an opposite viewpoint on the Fed. I think we need to keep the Fed because of the economy.”